Persistency and Money Demand Distortions in a Stochastic DGE Model with Sticky Prices and Capital

Michael Gail ()

Volkswirtschaftliche Diskussionsbeitraege from Universität Siegen, Fachbereich Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht

Abstract: This paper considers the implications of adding capital as a factor of production in a stochastic DGE model with sticky prices. Particular attention is given to the role of money demand and to the form of the utility function. I consider cash-in-advance- (CIA) as well as money-in-the-utility-function- (MIU) models, with CRRA and GHH preferences, to evaluate their ability to generate persistence. It is shown that even in a MIU-model with a GHH utility function and a high elasticity of labor supply with respect to the real wage the additional intertemporal substitution channel opened through capital accumulation does have a significant dampening influence on the persistence effects of monetary shocks. In a CIA-setup with GHH preferences the model can generate the liquidity effect. A multiplicatively separable CRRA utility function in the MIU-model cannot account for the observed persistent reactions of inflation and output either.

Keywords: Monetary Policy; New Neoclassical Synthesis; Sticky Prices; Persistency (search for similar items in EconPapers)
JEL-codes: E52 (search for similar items in EconPapers)
Date: Written
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Related works:
Working Paper: Persistency and Money Demand Distortions in a Stochastic DGE Model with Sticky Prices and Capital (2002)
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Persistent link: http://EconPapers.repec.org/RePEc:sie:siegen:103-02

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